I recently posted about a seminar I attended last week. The feedback I have received from that post has been significant. The responses have ranged from “Oh my Lord – that’s us” to “so, there is a way forward”. Great, but I want to concentrate on the first type of replies received.

So many firms understand that the way they operate and their business model isn’t great, but it’s all that they know. To try and move them to a new, more effective model takes a great leap in mental construct on behalf of the owners and managers in those firms.

One of the responses I received was from a bloke I know well who has just taken over as CEO of a professional knowledge firm. Well established, reasonable size and “good, traditional” brand. And he is frustrated up the wazoo!

It would appear from his email that the following issues pervade the organisation:

staff are rewarded with bonuses for hitting “productivity” targets;

The transfer from WIP into debtors (you know – actually billing the customer) is fraught in that, once the bills are raised, the customers get pissed off;

Consequence of this is that a lot of work remains in WIP as the senior people responsible for billing the WIP are too scared to raise the bill as they don’t want to have to deal with an angry customer;

Debtors ledger is out of control as there are a large amount of accounts “in dispute” which means that the whole thing is taking a massive amount of time and effort to clean up.

Now, from my view, this appears to be the antithesis of everything a professional knowledge firm should be. Let me posit my view of the warped thinking that enables such an environment to exist, let alone continue:

Productivity

We want our people to be working – agree on that. But, do we want them to be working on things that make a difference to the customer and are valued by the customer or do we want them doing things that waste a heap of time on customer accounts? The behaviour you reward is the behaviour that continues. By tying rewards (bonuses) to productivity targets, we are encouraging our people to bill as much time to the Holy WIP Ledger as possible. The argument goes that, when we record everything, it gives us a basis for billing everything to the customer (more on this below).

But what is the real message that we are sending to our people when we bonus (often ridiculous) productivity? Is it a message about effectiveness? And is it really a message about efficiency? Too many times, firm leaders sprout on about efficiency but the bonusing system actually penalises people from working more efficiently as their productivity targets won’t be met (the thinking goes: if I do this job more quickly, I won’t spend as much time and therefore, I stand less chance of getting the bonus). Where is the incentive for them to be more “efficient”?

As part of this system, you get the inevitable build up of your Holy WIP Ledger. Many firms see this as a “lead indicator” (as per last week’s post) when, in fact, it is a wish list that often bears very little resemblance to collection.

The other message you send to your people with the focus on hitting production targets as far as time spent is that they will only see a customer as something to be billed, not valued. The training that occurs as a consequence is that the “up and comers” get taught that to get ahead, you need to focus on pleasing the partner/manager with high productivity rather than pleasing the customer by delivering great outcomes.

As an aside, it is often the case that the less senior people very rarely (if ever) get to meet with the customers. How is this going to play out in their career development? How is this going to assist them with understanding the file and the customer needs? All information is “filtered” through the senior people before it gets to the actual “doers” of the work. The outcome – they flog their guts out to get promoted and then have no experience in dealing with customers face to face. I know of one firm in town here where the only people who see customers are the partners. Talk about rate limiting factors! An obvious outcome of this is that there is more rework required and heavier partner involvement in getting a file “customer ready” as the instructions are, more often than not, “lost in translation”. This though, in the warped world of timesheet based billing, is good – more chargeable hours to bill, higher “productivity” and a bigger Holy WIP Ledger.

Holy WIP Ledger (HWL)

So, we have a whole heap of people billing the Holy WIP ledger as hard as they can as this is the basis on which they get rewarded. The HWL is seen as a current asset in the books of the business and the financiers and owners of the business see it as “money in the bank”. All that needs to happen is for it to be billed.

Herein lies a bit of a problem. I have yet to meet with a firm where they state, honestly, that the HWL is fully recoverable. I know of one firm I have been dealing with who ran a HWL that was a pure estimate. They had timesheets to (sort of) back it up, but they knew that they were all rubbish so they just did an estimate. It was probably as approximately right as the timesheet based one anyway.

I recently did some work for a customer in a professional knowledge firm regarding the exit of a Partner. The HWL was obviously an issue to be addressed as the approach they were considering was one based on a mixture of profit and net assets. To get a true picture of net assets, there needed to be a full review of the HWL as everyone recognised that it was not valid and certainly not all collectible. In this circumstance, I suggested that we not go through this process. Instead, we developed an approach which looked at what the exiting Partner was happy to receive for his equity and what the continuing equity holders were prepared to pay for the share. As I said to the Managing Partner – “We can go through the whole process and get a result. The real risk here is, whilst it might be very right as far as the number goes, someone is likely to be pissed off”. The approach we used meant that my business didn’t get a whole heap of extra money for going through the valuation process, but, we did ensure that the Partners (exited and remaining) have kept very very good relationships and our customer very much values the creative approach we have adopted to solve their problem. In short, we provided value rather than a number. And we have further strengthened our relationship which will lead to more referrals and customer longevity.

The HWL is never right. The term in most professional firms is “lock-up” – how many days the firm has “locked up” in WIP and debtors. Often time, this number is horrendous – I know of some firms who have nearly one year’s worth of revenue “locked up”. For what purpose? You can’t spend it as it’s not real. Why bother measuring something that is so subjective as to be useless?

Debtors

To get a bill done from your HWL, it needs to go through a process. Often, it will be a senior person or Partner who goes through this process. More often than not, they will sit down and agonise over the process “If I bill them what’s on the HWL, they will have a melt-down”. So, what happens is that a bill will be raised against the customer for some portion of the HWL balance outstanding – in effect, what the person doing the billing believes they can get away with. Conversely, if you do bill them for everything that’s on the HWL, you are almost guaranteed to get a pissed off customer on the phone three days later (or, worse, never – as they quietly leave and have no intention of using you again – or paying your bill). There is no positive outcome that arises from this. For anyone.

Now, the current thinking with regard to this is that firms should budget for “write-offs”. In other words, they are saying (in words and deeds) that they know the HWL is crap. But they then hold that the basis of their charging of the client is on time spent. So, if the client has agreed to appoint them on time spent and they don’t bill the full time, are they really engaging them on that basis or on a “best estimate” at the end of the job? This is where “estimated ranges” of accounts come in to it. The client is told the cost of doing the work will be in the “range” of (say) $5,000 and $10,000. The client hears “$5,000”, the Partner hears “$10,000”. When the bill ends up being $8,000, both parties are pissed off.

What happens more often than people care to recognise is that there is a lot of “stuff” on the HWL that the senior guys are just too scared to bill. I have seen some aged HWLs which record work done up to two years prior that is yet to be billed. Seriously? Is it ever going to be billed? Or is it just there as a tacit admission that the system ultimately doesn’t work? This then leads to other KPIs in firms about the ageing of HWL. Most of these are there but not adhered to. If the WIP isn’t billable, write it off – with all the “appropriate” consequences.

But, back to the staff posting time to the HWL. How do they feel when the time they put in to a client is then written off? Where is the feelgood out of this? For anyone? What is their thinking at the end of a job when, they are encouraged and incentivised to record all the time only to have it written off? How will they think about the Manager/Partner who has “done this to them”? What message does it send about the “system”?

So, after much navel gazing and internal brinkmanship, the bill is sent out to the unsuspecting customer. The customer gets angry. Now, one of two things happens. The customer ring the Partner to have a whinge about the bill – the firms sends out a detailed HWL report to the customer detailing everything they have done (including the 15 minute phone call – billed as 18 minutes – where the customer recalls at least half of it was spent discussing the football results) for the period the bill covers. Guess what, they get more angry “They’re charging me for what?” Then they start to do the maths. “If he is $500 per hour and he spent 8 minutes talking about the football, he wants me to pay him $100 for that?” Not a great outcome.

Source: geektoauthor.blogspot.com.au

The other thing that can happen is that the customer simply doesn’t pay the bill. So, they start to get harassed by the ever-vigilant accounts department in the firm. The “friendly reminders” come out, then the “is there a problem” letters and so on until the letters get more threatening. Really good, positive stuff about customer engagement through this whole process.

At the end of the day, it gets nasty and people start defending positions. The firm will (usually) relent and write-off a part or the whole bill or, sadly, take the customer to arbitration. On this note, I remember a number of years ago when Ron Baker did his “Firm of the Future” tour around Australia. During this tour, I met with a number of the Legal Services Commissioners from various states around Australia. Their major source of work? Fee disputes. Their fervent wish was that all firms priced up front as the firms that did this hardly ever had a fee dispute.

So, we have a debtors ledger that is somewhat suspect as to the real collectability of the balance. Which means, when coupled with the HWL, the “lock up”metric used by a number of firms is inherently questionable.

After all of the above, is it any wonder why my firm dumped timesheets in 2007? It has saved innumerable hours, it has reduced customer complaints and has meant that the team in here are far more focused on delivering positive customer results rather than inputs. As stated above, the behaviours you get in your firm are the ones that you reward. Is your reward program incentivising the right behaviours? Is your firm business model one which is team and customer focused?

There is a better way of running a professional knowledge firm. Far less stressful, more enjoyable and one where you actually want to come to work. if you look after your people and customers, the profits will (generally) look after themselves.

The frustration of firm management can be reduced and/or removed. There are a band of highly experienced guys and girls at the Verasage Institute who can help you make the move. But you have to make the first step. I strongly encourage you to do so.